1. Chapter 14 – Management Accounting in a Changing Environment
ACTG 6310
Chapter 14 – Management Accounting in a Changing Environment

2. Determinants of Business Strategy, Organizational Architecture and Firm Value
Figure 14-1, Zimmerman 7e

3. Role of Accounting System in Firm Value
Technological innovation and market conditions affect a company’s business strategy
Business strategy interacts with the organizational architecture to provide incentives
Business strategy often causes changes in the accounting systems used
Incentives rewarded through the performance evaluation system affect the actions taken which affect the firm value

4. Quality
Quality has become very important in today’s competitive environment.
Definition – total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use.

5. Quality Consumer Viewpoint Producer’s Viewpoint Service Quality Cost
Customer satisfaction measures
Producer’s Viewpoint
Technical measurements
Zero defects
Value-added versus non-value added
Total quality control

6. TQM Programs Elements in TQM Programs:
Quality is a firm wide process
Quality is defined by the customer
Quality requires organizational changes
Quality is designed into the product
Knowledge of quality is often inside the organization.
Decentralization puts the decision rights in lower level employees hands
Performance evaluation and reward systems must also be revised.

7. Classification of Quality Costs
Prevention costs – preclude nonconformance with specifications
Appraisal costs – tests to determine conformance with specifications
Internal failure costs – redo defective products in order to sell as a normal product
External failure costs - costs incurred to right defective products in customer’s hands
Prevention costs best, external failure costs worst

8. Measurement
Lost profits – due to having to sell products at lower prices
Opportunity costs – forgone sales due to defective products (word of mouth to friends)
Not an accounting cost in the general ledger but a true economic cost
Cost of quality report

9. Quality Programs Just-in Time Six Sigma – 3 defects per million
Throughput time – total time from when a product starts the production process until it is ready for sale.
Six Sigma – 3 defects per million
Lean manufacturing and accounting – Eliminate all non-value added activities
Lean Six Sigma
TQM programs cause accounting changes in the firm

10. Potential Accounting Changes From JIT/Lean
Labor and overhead costs combined into conversion costs.
Factory overhead traced directly to JIT lines.
Material costs charged directly to products.
Conversion costs are assigned based on machine time.
A single inventory, Raw in Process, is used combining Raw Materials and Work in process.
Conversion costs are charged directly to finished goods.

11. Balanced Scorecard
Developed by Robert S. Kaplan and David O. Norton (Harvard Professors) in 1992
What is it?
An approach to performance measurement that combines traditional financial measures with non-financial measures to provide managers with richer and more relevant information about activities they are managing
It is an information system for employees of all levels of the organization
The BSC translates a business unit’s mission and strategy into tangible goals and measures.
Key performance indicators are identified and measured

12. Balanced Scorecard Why does a business need a balanced scorecard?
To monitor their business’ performance in the best way possible
To align individual goals with the firm’s strategic objectives (Goal congruence)
To recognize that performance measures influence the behavior of employees
To provide feedback about the strategy
As an investment in the long-term

13. Balanced Scorecard Four perspectives:
Financial
Customer
Internal Business Process
Innovation and Learning (Learning and growth)
Financial goals are the ultimate result for profit businesses but they are usually short-term
The last three perspectives are long-term in nature and alert management about future problems/opportunities

14. Figure 9-1

15. Balanced Scorecard Critical Financial Performance Variables
Operating profit
Net income
Return on Investment
Return on Equity
Return on Capital Employed
Economic Value Added
Return on Sales
Cash flow

16. Balanced Scorecard Critical Customer Performance Variables
Bookings or contracts scheduled
Backorders
Customer satisfaction
Customer response cards
Surveys
Letters of complaint
Customer retention
Average duration of relationship
Reasons for leaving

17. Balanced Scorecard Critical Customer Performance Variables (continued)
New customer acquisition
Customer profitability
Customer loyalty
Market share
Account share
Key account orders

18. Figure 9-2

19. Balanced Scorecard Critical Internal Process Performance Variables
Operations Processes
Capacity utilization
Inventory turnover
Quality measures
Zero defects
Cycle time measures
Lead time
On-time Delivery and delivery time

20. Balanced Scorecard Critical Internal Process Performance Variables
Operations Processes
Cycle time measures
Order fulfillment cycle - receipt of order to delivery
Throughput time - time to manufacture
Manufacturing Cycle Efficiency = Process time/Throughput time (Goal = 100%)
Cost measures

21. Balanced Scorecard Critical Internal Process Performance Variables
Innovation Processes
Number of new products
Market position in new products
Post-Sale Service Processes
Warranty and repair activities
Customer service
Invoicing and collection

22. Balanced Scorecard
Critical Innovation and Learning Performance Variables
People
Train people
Give them advancement potential
Employee satisfaction
Systems
Provide for upgrades and improvements
Organizational Procedures
Align organizational procedures and routines

23. Example

24. Managing Strategy and the Balanced Scorecard
Short-run versus long-run measures
Features of good balanced scorecards
Measures are appropriate for achieving strategy
Communicates strategy to all employees
Places strong emphasis on financial objectives and measures with nonfinancial measures as leading indicators of future financial performance
Limits the number of measures used to those most critical
Highlights problems that could affect future performance

25. Managing Strategy and the Balanced Scorecard
Pitfalls when implementing a balanced scorecard
Use actual cause and effect linkages not perceived linkages
Seek improvements through tradeoffs over time
Include subjective and objective measures that are hard to manipulate
Use nonfinancial along with financial measures
Use critical measures to focus attention rather than using too many measures
There is no guarantee that future profitability will follow target achievements in any nonfinancial area.
Poorly designed incentive programs

26. Example of BSC Mayo Clinic Rochester
A BSC is used to guide physicians and other employees to achieve success
Perspectives include
Quality
Scholarships
Patient satisfaction
Performance Measures include peer-reviewed papers, numbers of presentations, and number of grants awarded

27. Example of BSC Southwest Airlines Co. Performance Measures include
Load factors (percentage of seats occupied)
On time performance
Available seat miles
Denied boarding rates
Flight cancellation rates
Customer complaints filed with the Department of Transportation

28. Example of BSC PriceWaterhouse Coopers
Used a version of the BSC with the following measurements:
Divisional income – 60%
Generating cross-division income – 10%
Customer satisfaction (measured with surveys) – 10%
Development of new customers (new business) – 10%
Employee turnover (difference between company norm of 20% per year) – 10%

29. Example of BSC Tri-Cities Community Bank
Financial: Improved loan, deposit, and non-interest income
Customer: Customer retention rate, customer satisfaction ratings on quarterly surveys
Internal business: Number of successful referrals and/or cross-sells
Learning and growth: number of training hours employees receive, employee scores on in-house tests about sales, service, and product knowledge

30. Example of BSC Dell Computer Corporation Financial measures
Selling price
Margins
Overhead costs
Profits
Nonfinancial measures
Inventory turns
Accounts receivable days
Accounts payable days
Cash-conversion cycle

31. Balanced Scorecard
According to a recent survey by Bain & Co., approximately 50% of Fortune 1000 companies in North America and about 40% in Europe have adopted some version of the BSC. Additional implementers include the following:
ABB Switzerland (Engineering company)
AT&T Canada
Chemical Bank
Hilton Hotels
Sears
UPS
Wells Fargo Online Financial Services
Wendy’s International

32. Performance Measurement Systems
Important to use both financial and nonfinancial performance measurements
Outcome measures – lagging indicators
Based on what has happened in the past
Driver measures – leading indicators
Often nonfinancial in nature
Information helps determine future results
Ex: Poor quality will lead to reduced sales and net income
Must focus on both external and internal measures

33. How Many Measures Per Employee?
Employees should be accountable for no more measures than they can remember
Magic number is 7 plus or minus 2

34. Difficulties in Implementing Performance Measurement Systems
Poor correlation between nonfinancial measures and results
Fixation on financial results
Measures are not updated
Measurement overload (too many)
Managers will choose easiest measurements if given too many
Difficulty in establishing trade-offs between financial and nonfinancial measurements

35. Homework P14-1 – British Airways P14-3 – Fiedler International
P14-4 – Guest Watches
P14-6 – Old Town Roasters
P14-7 – The Pottery Store
DUE WEDNESDAY, APRIL 8